DOES AUDIT FIRM SIZE CONTRIBUTE TO AUDIT QUALITY? EVIDENCE FROM TWO EMERGING MARKETS

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Abstract

This study investigated whether the Big N audit firms in emerging markets can provide audits of high quality and mitigate information risk, by comparing the audit quality of Big N audit firms in Taiwan with those in China. The two countries share a similar cultural background and engage in frequent economic exchange; however, they have different legal systems and institutional environments. This study followed previous research in the use of bid-ask spread and discretionary accruals as proxy variables for information asymmetry and audit quality. Our results indicate that politico-economic differences between Taiwan and China influence the effectiveness of independent auditors when it comes to the mitigation of information asymmetry. Big N audit firms in Taiwan helped to mitigate information asymmetry and provided audit services of higher quality, whereas Big N firms in China were better able to constrain earnings management. Our results indicate that market concentration and market share have a stronger influence on reputation incentive and audit quality than does the size of an audit firm.

Keywords: Audit Quality, Information Asymmetric, Big N Audit Firms, Bid-Ask Spread, Emerging Markets

How to cite this paper: Wang, C. C., Kung, F. H. & Lin, K. H. (2014). Does audit firm size contribute to audit quality? Evidence from two emerging markets. Corporate Ownership & Control, 11(2), 108-119. https://doi.org/10.22495/cocv11i2p8